FERC’s November 21 meeting saw action on numerous items that many in the energy market have been waiting on, including four LNG export facilities in Texas, an expansion of El Paso Natural Gas Co. pipeline, and a new methodology for calculating the return on equity (ROE) for transmission owners in the power sector.
The latter action, involving two complaints filed against transmission owners in the Midcontinent Independent System Operator (MISO) was highlighted by commissioners and FERC staff as what the Commission will use for calculating ROE in other proceedings following a remand from the U.S. Court of Appeals for the D.C. Circuit. The orders grant rehearing on one complaint (EL14-12), applying the methodology to reach an ROE of 9.88%, effective in the fall of 2016 and ordering refunds, while the second complaint was dismissed and refunds were denied, based on a finding that the 9.88% ROE established in the first proceeding is just and reasonable.
Commissioner Richard Glick issued a partial dissent because of the lack of refunds in the second complaint proceeding, asserting that the refunds in the first case may amount to at least $100 million. He agreed on the methodology calculations and expressed appreciation to staff and his fellow commissioners for working collaboratively on the ROE matters. Because of the dollar figures involved and uncertainty around transmission investment, Glick said the new methodology should provide more clarity to investors.
Chairman Neil Chatterjee lauded his colleagues for reaching a consensus on the ROE methodology, labeling the approach legally durable and technically sound for future cases involving transmission owners. It will help provide much needed certainty for years to come, Chatterjee said.
During the media briefing after the meeting, Chatterjee said he wanted to ensure that the methodology adopted would withstand legal scrutiny, and having a 3-0 vote is important in that regard. A 2-1 vote would not provide the clarity and certainty needed for such large investments, he said.
The orders adopt the use of the discounted cash flow (DCF) model and the capital-asset pricing (CAPM) model to determine transmission owners’ cost of equity, FERC staff explained in a presentation at the meeting. The orders conclude that using the DCF and CAPM models will make the ROE determinations more accurately reflect how investors make their investment decisions, while avoiding deficiencies of other models, staff said.
For a zone of reasonableness to reach an ROE that is just and reasonable under the Federal Power Act, the methodology will be used to establish quartile ranges of what would be considered just and reasonable based on the risks faced by different transmission owners. If an ROE falls outside of a given quartile range, it is presumed to be unjust and unreasonable, FERC staff explained.
Applying the methodology in the first MISO complaint, the Commission found that the transmission owners’ 12.38 % base ROE is unjust and unreasonable because it is outside a quartile range. It concluded that a base ROE of 9.88% is a just and reasonable replacement, ordering refunds based on that determination.
To grant the requested relief in the second complaint, FERC would have to find that the 9.88% ROE established in the first complaint is unjust and unreasonable. The order finds, however, that the ROE is within the range of presumptive just and reasonable ROEs stemming from the first complaint case, dismissing the complaint and not ordering refunds.
The consensus among the commissioners on the ROE methodology was not there for the orders on pipeline and LNG export facilities. Glick dissented on most of the cases and dissented in part on the El Paso Natural Gas expansion, which garnered a 35-page concurring statement from Commissioner Bernard McNamee.
Glick and McNamee have had disagreements at past meetings, and their comments November 21 were a bit more cordial towards each other, noting that they have different views on the legal interpretations of the Natural Gas Act and National Environmental Policy Act. Glick said he has the utmost respect for McNamee because he truly believes his conviction on the legal issues is correct, but Glick disagrees with those views, asserting that McNamee is choosing which elements of the law and policy FERC is applying when it reviews NGA certificate applications.
Glick expressed frustration that FERC is not giving full consideration to greenhouse gas emissions associated with LNG export and new pipeline facilities because they involve the sensitive topic of climate change. But the D.C. Circuit directed FERC to consider GHG emissions and “we have to live with what the court said,” and not reach a conclusion that the emissions associated with the facilities would not be significant.
McNamee said he chose to write a lengthy concurring statement so everyone could see his legal analysis and thoughts on how FERC carries out its authority under the statutes. He disputed the notion that he is choosing to ignore the court or specific language in the laws. “Nothing could be further from the truth,” he said during the meeting.
Besides the El Paso expansion, FERC issued an order on rehearing for the Spire STL Pipeline LLC project (CP17-40), three LNG projects along the Brownsville Ship Channel in Brownsville, Texas, and facilities to expand an existing LNG export project near Corpus Christi, Texas. The latter facility is being developed by Corpus Christi Stage III LLC and Corpus Christi Liquefaction LLC.
The other three new export projects are being developed by Texas LNG Brownsville LLC, Rio Grande LNG LLC and Rio Bravo Pipeline Co. and Annova LNG Common Infrastructure LLC and three of its affiliates.
“The Commission has now completed its work on applications for 11 LNG export projects in the past nine months, helping the United States expand the availability of natural gas for our global allies who need access to an efficient, affordable and environmentally friendly fuel for power generation,” Chatterjee said in a statement.
By Tom Tiernan firstname.lastname@example.org